(Former
name, former address and former fiscal year, if changed since last report)

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [ ]

Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
[ ] No [ ]

Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.

Large
accelerated filer

[ ]

Accelerated
filer

[ ]

Non-accelerated
filer

[ ]
(Do not check if a smaller reporting company)

Smaller reporting
company

[X]

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]
No [ ]

The
number of shares outstanding of each of the issuer’s classes of common stock, as of November 12, 2012 is as follows:

Class
of Securities

Shares
Outstanding

Common
Stock, $0.001 par value

3,880,866

CHINA
PRECISION STEEL, INC.

Quarterly
Report on Form 10-Q

Three
Months Ended September 30, 2012

TABLE
OF CONTENTS

PART
I

FINANCIAL
INFORMATION

ITEM
1.

FINANCIAL
STATEMENTS

3

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

4

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

15

ITEM 4.

CONTROLS
AND PROCEDURES

15

PART
II

OTHER
INFORMATION

ITEM 1.

LEGAL
PROCEEDINGS

16

ITEM 1A.

RISK
FACTORS

16

ITEM 2.

UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

16

ITEM 3.

DEFAULTS
UPON SENIOR SECURITIES

16

ITEM 4.

MINE
SAFETY DISCLOSURES

16

ITEM 5.

OTHER
INFORMATION

16

ITEM 6.

EXHIBITS

17

- 2 -

PART
I

FINANCIAL
INFORMATION

ITEM
1.

FINANCIAL
STATEMENTS.

CHINA
PRECISION STEEL, INC.

CONSOLIDATED
FINANCIAL STATEMENTS

FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

INDEX
TO FINANCIAL STATEMENTS

Page(s)

Consolidated Balance
Sheets (unaudited)

F-1

Consolidated Statements
of Operations and Comprehensive Income (unaudited)

The
accompanying notes are an integral part of these consolidated financial statements.

F-1

China
Precision Steel, Inc. and Subsidiaries

Consolidated
Statements of Operations and Comprehensive Income

For
the Three Months Ended September 30, 2012 and 2011

(Unaudited)

Notes

2012

2011

Sales revenues

$

5,956,760

$

42,166,843

Cost of goods sold

7,423,709

42,105,073

Gross (loss)/profit

(1,466,949

)

61,770

Operating expenses

Selling expenses

29,273

68,304

Administrative expenses

442,615

294,076

Allowance for bad and doubtful debts

1,373,000

-

Depreciation and amortization expense

51,961

54,444

Total operating expenses

1,896,849

416,824

(Loss) from operations

(3,363,798

)

(355,054

)

Other income/(expense)

Other revenues

103

199

Interest and finance costs

(858,588

)

(669,928

)

Total other (expense)

(858,485

)

(669,729

)

(Loss) from operations before income tax

(4,222,283

)

(1,024,783

)

Provision for income tax

14

Current

-

54,312

Total income tax expense

-

54,312

Net (loss)

$

(4,222,283

)

$

(1,079,095

)

Basic (loss) per share

15

$

(1.09

)

$

(0.28

)

Basic weighted average shares outstanding

3,880,866

3,880,866

Diluted (loss) per share

15

$

(1.09

)

$

(0.28

)

Diluted weighted average shares outstanding

3,880,866

3,880,866

Components of comprehensive (loss)/income:

Net (loss)

$

(4,222,283

)

$

(1,079,095

)

Other comprehensive income:

Foreign currency translation adjustment

1,282,697

1,643,164

Comprehensive (loss)/income

$

(2,939,586

)

$

564,069

The
accompanying notes are an integral part of these consolidated financial statements.

F-2

China
Precision Steel, Inc. and Subsidiaries

Consolidated
Statements of Changes in Stockholders’ Equity

For
the Three Months Ended September 30, 2012

(Unaudited)

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Retained

Stockholders’

Share

Amount

Capital

Income

Earnings

Equity

Balance at June 30, 2012

3,880,866

$

3,880

$

75,685,066

$

19,097,295

$

24,084,353

$

118,870,594

Foreign currency translation adjustment

-

-

-

1,282,697

-

1,282,697

Net loss

-

-

-

-

(4,222,283

)

(4,222,283

)

Balance at September 30, 2012

3,880,866

$

3,880

$

75,685,066

$

20,379,992

$

19,862,070

$

115,931,008

The
accompanying notes are an integral part of these consolidated financial statements.

F-3

China
Precision Steel, Inc. and Subsidiaries

Consolidated
Statements of Cash Flows

For
the Three Months Ended September 30, 2012 and 2011

(Unaudited)

2012

2011

Cash flows from operating activities

Net (loss)

$

(4,222,283

)

$

(1,079,095

)

Adjustments to reconcile net income to net cash provided by operating activities

Depreciation and amortization

2,254,886

2,196,295

Allowance for bad and doubtful debts

1,373,000

-

Net changes in assets and liabilities:

Accounts receivable, net

694,880

(6,877,517

)

Inventories

(1,925,422

)

308,082

Prepaid expenses

206,353

66,760

Advances to suppliers

889,785

(586,403

)

Accounts payable and accrued expenses

456,346

1,805,922

Advances from customers

519,750

3,779,521

Other taxes payable

(108,457

)

662,673

Current income taxes

32,630

27,502

Net cash provided by operating activities

171,468

303,740

Cash flows from investing activities

Purchase of property, plant and equipment, including construction in progress

(7,424

)

(84,886

)

Net cash (used in) investing activities

(7,424

)

(84,886

)

Cash flows from financing activities

Repayments of short-term loans

-

(810,921

)

Net cash (used in) financing activities

-

(810,921

)

Effect of exchange rate

(171,282

)

37,366

Net (decrease) in cash

(7,238

)

(554,701

)

Cash and cash equivalents, beginning of period

1,602,805

2,707,754

Cash and cash equivalents, end of period

$

1,595,567

$

2,153,053

The
accompanying notes are an integral part of these consolidated financial statements.

F-4

China
Precision Steel, Inc.

Notes
to the Consolidated Financial Statements

(Unaudited)

1.
Description of Business

China
Precision Steel, Inc. (the “Company,” “CPSL” or “we”) is a niche steel processing company
principally engaged in the manufacture and sale of cold-rolled precision steel products for downstream applications including
automobile components and spare parts, kitchen tools, electrical appliances, roofing and food packaging materials. Raw materials,
hot-rolled steel coils, will go through certain reduction, heating and cutting processing procedures to give steel coils or plates
different thickness and specifications for deliveries in accordance with customers’ requirements. Specialty precision steel
offers specific control of thickness, shape, width, surface finish and other special quality features that compliment the emerging
need for highly engineered end use applications. Precision steel pertains to the precision of measurements and tolerances of the
above factors, especially thickness tolerance.

We
have five wholly-owned subsidiaries, Partner Success Holdings Limited (“PSHL”), Blessford International Limited (“Blessford
International”), Shanghai Chengtong Precision Strip Company Limited (“Chengtong”), Shanghai Blessford Alloy
Company Limited (“Shanghai Blessford”) and Shanghai Tuorong Precision Strip Company Limited (“Tuorong”).
The Company’s principal activities are conducted through our two operating subsidiaries, Chengtong and Shanghai Blessford
with manufacturing facilities located in Shanghai, the People’s Republic of China (the “PRC”). The sole activity
of Tuorong is the ownership of land use rights with respect to facilities utilized by Chengtong and Shanghai Blessford. PSHL and
Blessford International are both British Virgin Islands companies with the sole purpose of investment holding.

2.
Basis of Preparation of Financial Statements

The
financial statements have been prepared in order to present the consolidated financial position and consolidated results of operations
in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and are expressed
in terms of US dollars (see Note 3 “Functional Currency and Translating Financial Statements” below).

In
June and July 2012, the Company defaulted on the repayment obligations of its short-term and long-term bank loans totaling $43,751,689.
The Company is currently in discussions with its banks regarding the restructuring of these loans for repayment but has not yet
agreed on specific terms. There can be no assurance that the Company will be able to successfully work out a repayment plan or
otherwise fulfill its obligations under the loans. The uncertainty surrounding the successful restructuring
of our bank loans and our current lack of readily available liquidity provided by other third party sources raise substantial
doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that
might be necessary should the Company be unable to continue as a going concern.

The
accompanying unaudited consolidated financial statements as of September 30, 2012 and for the periods ended September 30, 2012
and 2011 have been prepared in accordance with US GAAP and with the instructions to Form 10-Q and Regulation S-X applicable to
smaller reporting companies. In the opinion of management, these unaudited consolidated financial statements include all adjustments
considered necessary to make the financial statements not misleading. The results of operations for the three months ended September
30, 2012 are not necessarily indicative of the results to be expected for the full year ending June 30, 2013.

3.
Summary of Significant Accounting Policies

The
following is a summary of significant accounting policies:

Cash
and Cash Equivalents – The Company considers all highly liquid debt instruments purchased with maturity period of
three months or less to be cash equivalents. The carrying amounts reported in the accompanying consolidated balance sheets
for cash and cash equivalents approximate their fair value.

F-5

Accounts
Receivable – Credit periods vary substantially across industries, segments, types and size of companies in the PRC where
we operate our business. Because of the niche products that we process, our customers are usually also niche players in their
own respective segment, who then sell their products to end product manufacturers. The business cycle is relatively long, as well
as the credit periods. The Company offers credit to its customers for periods of 60 days, 90 days, 120 days and 180 days. We generally
offer longer credit terms to long-standing recurring customers with good payment histories and sizable operations. Accounts receivable
are recorded at the time revenue is recognized and are stated net of allowance for doubtful accounts.

Allowance
for Doubtful Accounts – The Company maintains an allowance for doubtful accounts based on its assessment of the collectability
of the accounts receivable. Management determines the collectability of outstanding accounts by maintaining regular communication
with such customers and obtaining confirmation of their intent to fulfill their obligations to the Company. Management also considers
past collection experience, our relationship with customers and the impact of current economic conditions on our industry and
market. However, we note that the continuation or intensification of the current global economic crisis may have negative consequences
on the business operations of our customers and adversely impact their ability to meet their financial obligations. To reserve
for potentially uncollectible accounts receivable, management has made a 50% provision for all accounts receivable that are over
180 days past due and full provision for all accounts receivable over 1 year past due. From time to time, we will review these
credit periods, along with our collection experience and the other factors discussed above, to evaluate the adequacy of our allowance
for doubtful accounts, and to make changes to the allowance, if necessary. If our actual collection experience or other conditions
change, revisions to our allowances may be required, including a further provision which could adversely affect our operating
income, or write back of provision when estimated uncollectible accounts are actually collected. At September 30, 2012 and June
30, 2012, the Company had $4,655,538 and $3,231,613 of allowances for doubtful accounts, respectively.

Bad
debts are written off for past due balances over two years or when it becomes known to management that such amount is
uncollectible. There was a provision for accounts receivable bad debts of $1,373,000 and $nil recognized for the three months
ended September 30, 2012 and 2011, respectively.

Inventories
– Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average method. Cost of inventories comprises all costs of purchases, costs of conversion and other
costs incurred in bringing the inventories to their present location and condition. Costs of conversion of inventories
include fixed and variable production overheads, taking into account the stage of completion.

Intangible
Assets and Amortization – Intangible assets represent land use rights in China acquired by the Company and are stated
at cost less amortization and impairment, if any. Amortization of land-use rights is calculated on the straight-line method, based
on the period over which the right is granted by the relevant authorities in China.

Advances
to Suppliers – In order to ensure a steady supply of raw materials, the Company is required from time to time to make
cash advances to its suppliers when placing purchase orders, for a guaranteed minimum delivery quantity at future times when raw
materials are required. The advance is seen as a deposit to suppliers and guarantees our access to raw materials during periods
of shortages and market volatility, and is therefore considered an important component of our operations. Contracted raw materials
are priced at prevailing market rates when the advance purchase contracts are entered into. Advances to suppliers are shown net
of an allowance which represents potentially unrecoverable cash advances at each balance sheet date. Such allowances are based
on an analysis of past raw materials receipt experience and the credibility of each supplier according to its size and background.
In general, we do not provide allowances against advances paid to those PRC state-owned companies as there is minimal risk of
default. Our allowances for advances to suppliers are subjective critical estimates that have a direct impact on reported net
earnings, and are reviewed quarterly at a minimum to reflect changes from our historic raw materials receipt experience and to
ensure the appropriateness of the allowance in light of the circumstances present at the time of the review. It is reasonably
possible that the Company’s estimate of the allowance will change, such as in the case when the Company becomes aware of
a supplier’s inability to deliver the contracted raw materials or meet its financial obligations. As of September 30, 2012
and June 30, 2012, the Company had made allowances of advances to suppliers of $4,675,112 and $4,623,323, respectively.

F-6

Allowances
for advances to suppliers are written off when all efforts to collect the materials or recover the cash advances have been unsuccessful,
or when it has become known to the management that there is no intention by the suppliers to deliver the contracted raw materials
or refund the cash advances. To date, we have not written off any advances to suppliers.

Property,
Plant and Equipment – Property, plant and equipment are stated at cost less accumulated depreciation. The cost of an
asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition
and location for its intended use.

Depreciation
is computed on a straight-line basis over the estimated useful lives of the related assets for financial reporting purposes. The
estimated useful lives for significant property and equipment are as follows:

Buildings

10
years

Plant
and machinery

10
years

Motor
vehicles

5
years

Office
equipment

5
years

Repairs
and maintenance costs are normally charged to the statement of operations in the year in which they are incurred. In situations
where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected
to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.

Impairment
of Long-Lived Assets – The Company accounts for impairment of property, plant and equipment and amortizable intangible
assets in accordance with ASC Topic No. 360 “Property, Plant and Equipment” (“ASC 360”), which requires
the Company to evaluate a long-lived asset for recoverability when there is an event or circumstance that indicates the carrying
value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or
asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and
is measured as the excess of the carrying amount over the asset’s (or asset group’s) fair value. We primarily use
the income valuation approach to determine the fair value of our long-lived assets, with fair value being the price that would
be received from selling an asset in an orderly transaction between market participants at the measurement date.

Capitalized
Interest – The Company capitalizes interest cost on borrowings incurred during the new construction or upgrade of qualified
assets. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets.
During the three months ended September 30, 2012 and 2011, the Company capitalized $nil interest to construction-in-progress.

Construction-in-Progress
– Plant and production lines currently under development are accounted for as construction-in-progress. Construction-in-progress
is recorded at acquisition cost, including land rights cost, development expenditure, professional fees and the interest expenses
capitalized during the course of construction for the purpose of financing the project. Upon completion and readiness for use
of the project, the cost of construction-in-progress is to be transferred to property, plant and equipment.

Contingent
Liabilities and Contingent Assets – A contingent liability is a possible obligation that arises from past events
and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the Company. It can also be a present obligation arising from past events that is not recognized
because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured
reliably.

A
contingent liability is not recognized but is disclosed in the notes to the financial statements. When a change in the probability
of an outflow occurs so that outflow is probable, the contingency is then recognized as a provision.

A
contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain events not wholly within the control of the Company.

F-7

Contingent
assets are not recognized but are disclosed in the notes to the financial statements when an inflow of economic benefits is probable.
When inflow is virtually certain, an asset is recognized.

Advances
from Customers – Advances from customers represent advance cash receipts from customers and for which goods have
not been delivered or services have not been rendered at each balance sheet date. Advances from customers for goods to be
delivered or services to be rendered in the subsequent period are carried forward as deferred revenue.

Revenue
Recognition – Revenue from the sale of goods and services is recognized on the transfer of risks and rewards of ownership,
which generally coincides with the time when the goods are delivered to customers and the title has passed and services have been
rendered. Revenue is reported net of all VAT taxes. Other income is recognized when it is earned.

Functional
Currency and Translating Financial Statements – The Company’s principal country of operations is the PRC. Our
functional currency is Chinese Renminbi; however, the accompanying consolidated financial statements have been expressed in
United States Dollars (“USD”). The consolidated balance sheets have been translated into USD at the exchange
rates prevailing at each balance sheet date. The consolidated statements of operations and cash flows have been translated
using the weighted-average exchange rates prevailing during the periods of each statement. The registered equity capital
denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution.
All translation adjustments resulting from the translation of the financial statements into the reporting currency are dealt
with as other comprehensive income in stockholders’ equity.

Accumulated
Other Comprehensive Income – Accumulated other comprehensive income represents the change in equity of the Company during
the periods presented from foreign currency translation adjustments.

Taxation
– Taxation on overseas profits has been calculated on the estimated assessable profits for the year at the rates of
taxation prevailing in the country in which the Company operates.

United
States

China
Precision Steel, Inc. is subject to United States federal income tax at a tax rate of 34%. No provision for income taxes in the
United States has been made as China Precision Steel, Inc. had no taxable income in fiscal years 2012 and 2011.

BVI

PSHL
and Blessford International were incorporated in the British Virgin Islands and, under the current laws of the British Virgin
Islands, are not subject to income taxes.

PRC

Provision
for the PRC enterprise income tax is calculated at the prevailing rate based on the estimated assessable profits less available
tax relief for losses brought forward. The Company does not accrue taxes on unremitted earnings from foreign operations
as it is the Company’s intention to invest these earnings in the foreign operations indefinitely.

Enterprise
income tax

On
March 16, 2007, the National People’s Congress of China passed The Enterprise Income Tax Law (the “New EIT Law”),
and on December 6, 2007, the State Council of China passed the Implementing Rules for the EIT Law (“Implementing Rules”)
which took effect on January 1, 2008. The New EIT Law and Implementing Rules impose a unified enterprise income tax (“EIT”)
of 25% on all domestic-invested enterprises and foreign invested entities (“FIEs”), unless they qualify under certain
limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than
benefiting from the old FIE tax laws, and its associated preferential tax treatments, beginning January 1, 2008.

F-8

Despite
these changes, the EIT Law gives the FIEs established before March 16, 2007 (“Old FIEs”) a five-year grandfather period
during which they can continue to enjoy their existing preferential tax treatments, commonly referred to as “tax holidays”,
until these holidays expire. As an Old FIE, Chengtong’s tax holiday of a 50% reduction in the 25% statutory rates expired
on December 31, 2008 and it is currently subject to the 25% statutory rates since January 1, 2009; Shanghai Blessford’s
full tax exemption from the enterprise income tax expired on December 31, 2009, and it is subject to a 50% reduction for the three
subsequent years expiring on December 31, 2012. Subsequent to the expiry of their tax holidays, Chengtong and Shanghai Blessford
will be subject to enterprise income taxes at 25% or the prevailing statutory rates. The discontinuation of any such special or
preferential tax treatment or other incentives would have an adverse effect on any organization’s business, fiscal condition
and current operations in China.

Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and
credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents
the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets
and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.

The
Company follows the provisions of the ASC Topic No. 740 “Accounting for Income Taxes” and “Accounting for Uncertainty
in Income Taxes – an interpretation of FASB Statement No. 109” (“ASC 740”). ASC 740 requires the recognition
of tax benefits or expenses based on the estimated future tax effects of temporary differences between the financial statements
and tax bases of its assets and liabilities. Deferred tax assets and liabilities primarily relate to tax basis differences on
unrealized gains on corporate equities, stock-based compensation, amortization periods of certain intangible assets and differences
between the financial statements and tax bases of assets acquired.

The
Company recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy
changes in the PRC. However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued
by current officials in the PRC.

Based
on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits
as of September 30, 2012 is not material to its results of operations, financial condition or cash flows. The Company also believes
that the total amount of unrecognized tax benefits as of September 30, 2012, if recognized, would not have a material effect on
its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based
on current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next
12 months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial
condition or cash flows.

Value
added tax

The
Provisional Regulations of the People’s Republic of China Concerning Value Added Tax promulgated by the State Council came
into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the People’s
Republic of China Concerning Value Added Tax, value added tax is imposed on goods sold in or imported into the PRC and on processing,
repair and replacement services provided within the PRC.

Value
added tax payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved)
on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for
the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of value added
tax included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods
and services in the same financial year.

F-9

The
revised People’s Republic of China Tentative Regulations on Value Added Tax became effective on January 1, 2009 with the
issuance of Order of the State Council No. 538. With the implementation of this VAT reform, input VAT associated with the purchase
of fixed assets is now deductible against output VAT.

Retirement
Benefit Costs – According to the PRC regulations on pension, Chengtong and Shanghai Blessford contribute to a defined
contribution retirement scheme organized by municipal government in the province in which Chengtong and Shanghai Blessford were
registered and all qualified employees are eligible to participate in the scheme. Contributions to the scheme are calculated at
37% of the employees’ salaries above a fixed threshold amount and the employees contribute 11%, while Chengtong and Shanghai
Blessford contribute the balance contribution of 26%. The Group has no other material obligation for the payment of retirement
benefits beyond the annual contributions under this scheme.

For
the three months ended September 30, 2012 and 2011, the Company’s pension cost charged to the statements of operations under
the plan amounted to $64,741 and $69,338, respectively, all of which have been paid to the National Social Security Fund.

Fair
Value of Financial Instruments – The carrying amounts of certain financial instruments, including cash, accounts receivable,
other receivables, short-term loans, accounts payable, accrued expenses, and other payables approximate their fair values as at
September 30 and June 30, 2012 because of the relatively short-term maturity of these instruments. The Company considers the carrying
amount of long-term loans to approximate their fair values based on the interest rates of the instruments and the current market
rate of interest.

Use
of Estimates – The preparation of financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

4.
Concentrations of Business and Credit Risk

The
Company’s list of customers whose purchases from us were 10% or more of total sales during the three months ended September
30, 2012 and 2011 is as follows:

2012

2011

a. Customers

$

% to
sales

$

% to
sales

Changshu Jiacheng Steel Plating Co., Ltd.

699,359

12

*

*

Unimax & Far Corporation

637,147

11

*

*

Shanghai Wozi Jintian Blade Co., Ltd.

607,652

10

*

*

Shanghai Shengdejia Metal Co. Ltd

*

*

7,505,117

18

Hangzhou Cogeneration Import & Export Co., Ltd.

*

*

7,504,827

18

Shanghai Changshuo Steel Co., Ltd.

*

*

5,644,432

13

Zhejiang Yongfeng Steel Co., Ltd.

*

*

5,271,256

13

*
Not 10% customers for the relevant periods

The
Company’s list of suppliers whose sales to us exceeded 10% of our total purchases during the three months ended September
30, 2012 and 2011 is as follows:

2012

2011

b. Suppliers

$

% to purchases

$

% to purchases

Hebei Nuojin Trading Co., Ltd.

1,611,038

29

*

*

Shanghai Tuoda Metal Materials Co., Ltd.

1,174,399

21

*

*

Shanghai Piyun Steel Co., Ltd.

*

*

9,450,311

26

Dachang Huizu Baosheng Steel Products Co., Ltd.

*

*

7,117,889

20

Wuxi Hangda Trading Co., Ltd.

*

*

4,386,389

12

*
Not 10% suppliers for the relevant periods

F-10

Our
management continues to take appropriate actions to perform ongoing business and credit reviews of our customers to reduce our
exposure to new and recurring customers who have been deemed to pose a high credit risk to our business based on their commercial
credit reports, our collection history, and our perception of the risk posed by their geographic location. We have halted all
our direct sales to customers located in the Philippines since the year ended June 30, 2009 as we consider the associated credit
risk to be relatively high. Based on publicly available reports, such as that issued by A.M. Best, there is a high risk that financial
volatility may erupt in that country due to inadequate reporting standards, a weak banking system or asset markets and/or poor
regulatory structure. We expect to resume such exports when conditions improve.

5.
Accounts Receivable

The
Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its domestic and
international customers and clients and maintains allowances for bad and doubtful accounts based on factors surrounding the credit
risk of specific customers and clients, historical trends, and other information. Trade accounts receivable, net totaled $57,932,138
and $59,116,931 as of September 30, 2012 and June 30, 2012, respectively.

From
time to time, accounts receivable are reviewed for changes from the historic collection experience to ensure the appropriateness
of the allowances. These estimates have been relatively accurate in the past and currently there is no need to revise such estimates.
However, we will review such estimates more frequently when needed, and make revisions if necessary. The continuation or intensification
of the current global economic crisis and turmoil in the global financial markets may have negative consequences for the business
operations of our customers and adversely impact their ability to meet their obligations to us. A significant change in our collection
experience, deterioration in the aging of receivables and collection difficulties could require that we increase our estimate
of the allowance for doubtful accounts. Any such additional bad debt charges could materially and adversely affect our future
operating results.

6.
Inventories

ASC
330-10-35, “Adjustments to Lower of Cost or Market”, requires us to reduce the carrying value of inventory when
there is evidence that the utility of goods will be less than cost, whether due to physical deterioration, obsolescence,
changes in price levels or other causes. The Company recorded inventory write-downs in the amounts
of $400,762 and $396,322 for the three months ended
September 30, 2012 and 2011, respectively. These amounts were recognized as a loss in each respective
period.

As
of September 30, 2012 and June 30, 2012, inventories consisted of the following:

At cost:

September 30, 2012

June 30, 2012

Raw materials

$

1,772,554

$

1,711,735

Work in progress

996,977

1,064,229

Finished goods

8,516,329

6,409,395

Consumable items

6,730,353

6,727,183

18,016,213

15,912,542

Less: provision

(400,762

)

(396,322

)

$

17,615,451

$

15,516,220

Costs
of finished goods include direct labor, direct materials, and production overhead before the goods are ready for sale.

F-11

Consumable
items represent parts used in our cold rolling mills and other equipment that need to be replaced from time to time when necessary
to ensure optimal operating results, such as bearings and rollers.

Cash
advances are shown net of allowances of $4,675,112 and $4,623,323 at September 30, 2012 and June 30, 2012, respectively.

Some
of our suppliers are state-owned companies in the PRC or their subsidiaries. We believe that advances paid to state-owned companies
are ultimately collectible because they are backed by the full faith and credit of the PRC government. As such, we generally do
not provide allowances against such advances.

8.
Property, Plant and Equipment

Property,
plant and equipment, stated at cost less accumulated depreciation, consisted of the following:

September 30, 2012

June 30, 2012

Plant and machinery

$

77,878,747

$

77,064,727

Buildings

23,700,693

23,438,143

Motor vehicles

658,894

651,595

Office equipment

545,411

539,416

102,783,745

101,693,881

Less: Accumulated depreciation

(36,588,925

)

(33,940,890

)

$

66,194,820

$

67,752,991

Depreciation
expense related to manufacturing is included as a component of cost of goods sold. During the three months ended September 30,
2012 and 2011, depreciation totaling $1,782,079 and $1,606,329, respectively, was included as a component of cost of goods sold.

The
Company acquired land use rights in August 2004 and December 2006 for 50 years that expire in August 2054 and December 2056, respectively.
The land use rights are amortized over a fifty-year term. An amortization amount of approximately $37,000 is to be recorded each
year starting from the financial year ended June 30, 2009 for the remaining lease period.

Amortizable
intangible assets of the Company are reviewed when there are triggering events to determine whether their carrying value has become
impaired, in conformity with ASC 360. The Company also re-evaluates the periods of amortization to determine whether subsequent
events and circumstances warrant revised estimates of useful lives.

11.
Short-Term Loans

Short-term
loans consisted of the following:

September 30, 2012

June 30, 2012

Loan dated June 29, 2011, due July 31, 2012, with an interest rate at 115% of the standard market rate set by the People’s Bank of China (“PBOC”) (6.9% at September 30, 2012) per annum (Notes 6 and 8)

7,980,347

7,891,943

Bank loan dated June 29, 2011, due July 31, 2012 with an interest rate at 115% of the standard market rate set by PBOC (6.9% at September 30, 2012) per annum (Notes 6, 8 and 10)

19,571,342

19,354,534

$

27,551,689

$

27,246,477

The
above bank loans outstanding at September 30, 2012 are Renminbi (“RMB”) loans, carry an interest rate of 1.15 times
the standard market rate set by the PBOC, and are secured by inventories, land use rights, buildings and plant and machinery,
and guaranteed by PSHL and our former Chairman, Mr. Wo Hing Li. In addition, pursuant to a bank loan agreement entered into between
the Company and Raiffeisen Zentralbank Osterreich AG (“RZB”), Mr. Li undertakes to maintain a shareholding percentage
in the Company of not less than 33.4% unless otherwise agreed to with RZB.

The
weighted-average interest rate on short-term loans at September 30, 2012 and 2011 was 6.9% and 7.54%, respectively. Principal
and interest under the short-term loans totaling $27,551,689 with RZB were to be repaid in full on July 31, 2012, but the
Company has defaulted on this repayment obligation. The Company is currently in discussions with RZB regarding the
restructuring of the loans for repayment but has not yet agreed on specific terms. Any restructuring will be subject to
approval by RZB’s governing bodies, and to the Company’s ability to meet certain conditions and requirements that
may be imposed by the Bank. RZB also has the right to take possession of the collateral granted in connection with their
respective loan agreements, which action would have a material adverse impact on the Company.

As
part of the ongoing discussions with RZB to potentially restructure our short-term loans, we are putting in place a series of
measures to cut costs and improve overall profitability including expanding our customer base to increase total demand, strategizing
our product mix to re-focus on our competitive advantage and niche capabilities including the ultra-thin low-carbon and high strength
high-carbon products, streamlining production and reducing the number of workers in response to lower demand, hiring professionals
and technicians to improve our production management and increase quality control, and continuing to carry out research and development
(“R&D”) to improve profitability of existing products and launch new high value-add products.

12.
Long-Term Loan – Current Portion

September 30, 2012

June 30, 2012

Bank loan dated June 29, 2010, due June 15, 2016 with an interest rate of the London Interbank Offered Rate (“LIBOR”) plus 4.5% (5.1307% at September 30, 2012) per annum (Note 8)

$

16,200,000

$

16,200,000

F-13

On
January 29, 2010, Shanghai Blessford entered into a Senior Loan Agreement with DEG -Deutsche Investitions-Und Entwicklungsgesellschaft
Mbh (“DEG”) for a loan amount up to $18,000,000 at an annual interest rate of 4.5% above the six-month USD LIBOR rate.
The loan is to be repaid semi-annually over five years starting on December 15, 2011 and is secured by a mortgage on the new cold
rolling line and annealing furnaces at Shanghai Blessford’s facilities and guaranteed by the Company.

In
June 2012, the Company has defaulted on its semi-annual principal and interest repayment obligation. The Company is currently
in discussions with DEG regarding the restructuring of the loans for repayment but has not yet agreed on specific terms. Until
such agreement is reached, DEG has the right to cancel the total outstanding commitment of the loan, demand immediate repayment
of all or part of the loan with accrued interest, and/or terminate the loan agreement. DEG also has the right to take possession
of the collateral granted in connection with its respective loan agreements, which action would have a material adverse impact
on the Company.

13.
Stockholders’ Equity

Reverse
Stock Split

In
June 2012, the stockholders of the Company approved the authority of the Company’s Board of Directors to effect a one-for-twelve
reverse stock split of the Company’s outstanding common stock. The reverse stock split became effective on August 27, 2012
and as a result of the reverse stock split, the issued and outstanding shares of the Company’s common stock decreased to
3,880,866 shares, without any change in the par value of such shares. These consolidated financial statements and accompanying
notes to the consolidated financial statements give retroactive effect to the reverse stock split for all periods presented.

Stock
Warrants

On
November 6, 2007, in connection with the Subscription Agreement, the Company issued to certain institutional accredited investors
warrants to purchase 118,333 shares of Common Stock valued at $5,374,748, and Roth Capital Partners, LLC, as placement agent,
received warrants to purchase 18,800 shares of Common Stock valued at $887,504. These amounts were recorded as syndication fees
offsetting additional paid-in capital. Warrants issued to Roth Capital were not exercised and expired on November 5, 2010.

Information
with respect to stock warrants outstanding is as follows:

Exercise Price

Outstanding June 30, 2012

Granted

Expired or Exercised

Outstanding September 30, 2012

Expiration Date

$

101.40

118,333

-0-

-0-

118,333

May 5, 2013

14.
Income Taxes

For
PRC enterprise income tax reporting purposes, the Company is required to compute a 10% salvage value when computing depreciation
expense and add back the allowance for doubtful debts. For financial reporting purposes, the Company does not take into account
a 10% salvage value when computing depreciation expenses.

The
tax holiday resulted in tax savings as follows:

Three months ended
September 30,

2012

2011

Tax savings

$

0.00

$

54,312

Benefit per share

Basic

$

0.00

$

0.00

Diluted

$

0.00

$

0.00

F-14

Significant
components of the Group’s deferred tax assets and liabilities as of September 30, 2012 and June 30, 2012 are as follows:

Deferred tax assets and liabilities:

September 30, 2012

June 30, 2012

Net operating loss carried forward

$

7,748,898

$

6,668,613

Temporary differences resulting from allowances

2,421,237

2,051,326

Net deferred income tax asset

10,170,135

8,719,939

Valuation allowance

(10,170,135

)

(8,719,939

)

$

-

$

-

The
Company has not recognized a deferred tax liability as its foreign subsidiaries do not have any undistributed earnings as of September
30, 2012. A deferred tax liability will be recognized when the Company has undistributed earnings and no longer plans to permanently
reinvest undistributed earnings.

A
reconciliation of the provision for income taxes with amounts determined by the PRC income tax rate to income tax expense per
books is as follows:

Three months ended September 30,

2012

2011

Computed tax at the PRC statutory rate of 25%

$

(1,080,297

)

$

(268,660

)

Valuation allowance

1,450,196

402,221

Income not subject to tax

-

(24,950

)

Expenses not deductible for tax

(369,899

)

13

Benefit of tax holiday

-

(54,312

)

Income tax expense per books

$

-

54,312

Income
tax expense consists of:

Three months ended
September 30,

2012

2011

Income tax expense for the period – PRC

$

-

$

54,312

Deferred income tax benefit – PRC

-

-

Income tax expense per books

$

-

$

54,312

15.
(Loss) Per Share

ASC
260-10 requires a reconciliation of the numerator and denominator of the basic and diluted (loss)/earnings per share (EPS) computations.

For
the three months ended September 30, 2012, warrants to purchase 118,333 shares at an exercise price of $101.40 were not included
as their effect would have been anti-dilutive, however, securities represented by the 118,333 warrants still outstanding could
potentially dilute basic earnings per share in the future.

For
the three months ended September 30, 2011, warrants to purchase 118,333 shares of common stock at an exercise price of $101.40
were not included as their effect would have been anti-dilutive.

F-15

The
following reconciles the components of the EPS computation:

Income

Shares

Per Share

(Numerator)

(Denominator)

Amount

For the three months ended September 30, 2012:

Net (loss)

$

(4,222,283

)

Basic EPS (loss) available to common shareholders

$

(4,222,283

)

3,880,866

$

(1.09

)

Effect of dilutive securities:

Warrants

-

Diluted EPS (loss) available to common shareholders

$

(4,222,283

)

3,880,866

$

(1.09

)

For the three months ended September 30, 2011:

Net (loss)

$

(1,079,095

)

Basic EPS (loss) available to common shareholders

$

(1,079,095

)

3,880,866

$

(0.28

)

Effect of dilutive securities:

Warrants

-

Diluted EPS (loss) available to common shareholders

$

(1,079,095

)

3,880,866

$

(0.28

)

16.
Contingencies and Commitments

Legal
Proceedings

The
Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business.

On
March 15, 2012, the Company received notice of a complaint filed by a Mr. Haining Zhang and China Venture Partners, Inc. in the
U.S. Southern District Court of New York on March 9, 2012, against several defendants, including the Company, as successor to
OraLabs Holding Corp. In the complaint Mr. Zhang is alleging, among other things, breach of contract by the Company and certain
of our former officers, directors and control persons, in connection with our December 2006 acquisition of Partner Success Holdings
Limited. Among other things, Mr. Zhang alleges that the defendants breached an agreement to compensate him for services he allegedly
performed in connection with seeking out a merger candidate for the Company. The Company believes that the suit is without merit
and intends to vigorously defend its interests in the case. The Company was granted court permission to file a motion to dismiss
the action as against it. Prior to filing the motion to dismiss, plaintiffs amended their complaint. Accordingly, the Company
filed a motion to dismiss the amended complaint. That motion has now been fully briefed by the parties. The court has not yet
advised whether it will permit oral argument on the motion prior to issuing a decision.

Although
an estimate of any potential loss cannot be made at this time, the Company does not believe that its business or financial condition
is materially adversely affected.

Capital
Commitments

As
of September 30, 2012, the Company did not have any capital commitments (June 30, 2012: $nil).

17.
Impairment

We
determine impairment of long-lived assets, including property, plant and equipment and amortizable intangible assets, by measuring
the estimated undiscounted future cash flows generated by these assets, comparing the result to the assets’ carrying values
and, if necessary, adjusting the assets to the lower of its carrying value or fair value and charging current operations for the
measured impairment. The determination of the undiscounted future cash flows and fair value of these assets are subject to significant
judgment.

The
assets are subject to impairment consideration under ASC 360-10-35-17 if events or circumstances indicate that their
carrying amounts might not be recoverable. In accordance with ASC 360, as of September 30, 2012, as the Company’s
market capitalization was lower than the carrying value of its assets, management performed an impairment test pursuant to
the guidance outlined in ASC 360-10-35-21 and no impairment charges were recognized for the relevant year. As of September
30, 2012, the Company expects these assets to be fully recoverable based on the result of the impairment test. Goodwill
amounting to $99,999 as at September 30, 2012 was considered immaterial and not tested for impairment in accordance with ASC
350.

F-16

18.
Recent Accounting Pronouncements

In
December 2011, the FASB issued ASU No. 2011-11, Disclosures About Offsetting Assets and Liabilities, (“ASU 2011-11”).
The amendments in ASU 2011-11 require entities to disclose information about offsetting and related arrangements to enable users
of financial statements to understand the effect of those arrangements on an entity’s financial position. The amendments require
enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either
(i) offset in accordance with current literature or (ii) subject to an enforceable master netting arrangement or similar agreement,
irrespective of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years, and
interim periods within those years, beginning on or after January 1, 2013. This standard will become effective for the Company
beginning July 1, 2013. The Company does not believe adoption of this new guidance will have a significant impact on its consolidated
financial statements.

In
July 2012, the FASB issued ASU No.
2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for
Impairment (“ASU 2012-02”). ASU 2012-02 amends Topic 350 by establishing an optional two-step analysis for
impairment testing of indefinite-lived intangibles other than goodwill. This update allows an entity the option to first
assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. Under that
option, an entity no longer would be required to calculate the fair value of the intangible asset unless the entity
determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its
carrying amount. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after
September 15, 2012 and early adoption is permitted. This standard will become effective for
the Company beginning July 1, 2013. The Company does not believe adoption of this new guidance will have a significant impact
on its consolidated financial statements.

F-17

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking
Statements

In addition to historical
information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,”
“anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,”
“aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements
include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products;
any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives
of management for future operations; and any statements regarding future economic conditions or performance, as well as all assumptions,
expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties, as well as assumptions, which, if they were to ever
materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by
such forward-looking statements. Potential risks and uncertainties include, among other things, factors such as: plans to expand
our exports outside of China; plans to increase our production capacity and the anticipated dates that such facilities may commence
operations; our ability to obtain additional funding for our continuing operations and to fund our expansion; our ability to meet
our financial projections for any financial year; our ability to retain our key executives and to hire additional senior management;
continued growth of the Chinese economy and industries demanding our products; our ability to secure at acceptable prices the raw
materials we need to produce our products; political changes in China that may impact our ability to produce and sell our products
in our target markets; general business conditions and competitive factors, including pricing pressures and product development;
and changes in our relationships with customers and suppliers. You should carefully review the risk factors described in other
documents we file from time to time with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K
for our fiscal year ended June 30, 2012.

The following discussion
should be read in conjunction with our unaudited consolidated financial statements and the related notes that appear in Part I,
Item 1, “Financial Statements,” of this quarterly report. Our unaudited consolidated financial statements are stated
in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles. The following
discussion and analysis covers the Company’s unaudited consolidated financial condition at September 30, 2012 and June 30,
2012, the end of its prior fiscal year, and its unaudited consolidated results of operation for the three months ended September
30, 2012 and 2011.

Use of Terms

Except as otherwise indicated by the context,
all references in this report to:

●

“CPSL,” “Company,” “Group,” “we,” “us” or “our” are to China Precision Steel, Inc., a Delaware corporation, and its direct and indirect subsidiaries;

“Exchange Act” are to the Securities Exchange Act of 1934, as amended;

●

“RMB” are to Renminbi, the legal currency of China; and

●

“U.S. dollar,” “USD,” “US$” and “$” are to the legal currency of the United States.

Overview of the Company’s Business

We are a niche and
high value-added steel processing company principally engaged in the manufacture and sale of high precision cold-rolled steel products,
in the provision of heat treatment and in the cutting and slitting of medium and high-carbon hot-rolled steel strips. We use commodity
steel to create a specialty premium steel. Specialty precision steel pertains to the precision of measurements and tolerances of
thickness, shape, width, surface finish and other special quality features of highly engineered end-use applications.

We conduct our operations
principally in China through our wholly-owned operating subsidiaries, Chengtong and Shanghai Blessford, which are wholly owned
subsidiaries of our direct subsidiary, PSHL. Most of our sales are made domestically in China; however, we began exporting during
fiscal 2007 and our overseas market currently covers Indonesia, Thailand, the Caribbean, Nigeria, Ethiopia and Turkey. We intend
to further expand into additional overseas markets in the future, subject to suitable market conditions and favorable regulatory
controls.

To remodel our business
to make it sustainable, we are putting in place a series of measures to cut cost and increase overall profitability. These measures
include: (1) initiating additional sales and marketing efforts to expand our customer base and increase total demand; (2) strategizing
our product mix to re-focus on our niche capabilities including the ultra-thin low-carbon and high-strength high-carbon products;
(3) streamlining production and reducing the number of workers; (4) hiring professionals and technicians to improve production
management and increase quality control; (5) continuing to carry out R&D to improve profitability of existing products and
launch new high value-add products; and (6) improving working capital efficiency by increasing turnovers of advances to suppliers
and accounts receivables. We will also continue to take appropriate actions to perform business and credit reviews of customers
and suppliers with the downward pressure in the PRC economy which has caused many difficulties faced by businesses.

First Quarter Financial Performance
Highlights

During
the three months ended September 30, 2012, we largely reduced the production and sales of our loss-making low-carbon cold-rolled
steel products as part of our strategies to streamline production, and gross loss for the three months ended September 30, 2012
decreased to $1,466,949 from $2,952,641 for the immediate prior quarter ended June 30, 2012. However,
tightened credit and slowing growth in China continued to cause a slow turnover of our accounts receivable for the three months
ended September 30, 2012, a trend that is strongly correlated to the experience of other companies in the coal and steel sectors
in China during the past year.

During
the three months ended September 30, 2012, we sold a total of 7,753 tons of products, a decrease of 37,795 tons from 45,548 tons
a year ago, largely due to the decrease in sales of low-carbon cold-rolled steel products mentioned above. Despite a downward
trend in steel prices during the quarter, our average cost per unit sold increased 3.6% while average selling prices decreased
17.1% period-on-period, mainly due to increases in factory overhead and direct labor per unit sold as a result of the substantially
reduced units sold. Decreased sales volume coupled with high costs led to a gross loss of $1,466,949
and a net loss of $4,222,283 for the three months ended September 30, 2012. Total company backlog as of September 30, 2012 was
$6,558,731.

- 5 -

In June and July 2012, we defaulted on the
repayment obligations of our short-term and long-term bank loans totaling $43,751,689. We are currently in discussions with our
banks regarding the restructuring of these loans for repayment but have not yet agreed on specific terms. Any restructuring will
be subject to approval by the banks’ governing bodies, and to our ability to meet certain conditions and requirements that
may be imposed by the banks. There can be no assurance that the Company will be able to successfully work out a repayment plan
or otherwise fulfill its obligations under the loans. We are implementing a series of measures, discussed above, to remodel our
business to make it sustainable, and as part of the ongoing discussions with banks to potentially restructure our bank loans.

We believe that high barriers to entry in the
Chinese domestic precision cold-rolled steel industry still exist because of the level of technological expertise and the amount
of capital required for operation. Although we expect slowing demand and volatilities in both domestic and international markets,
and a difficult operating environment due to high inflation and rising costs which could have adverse impacts on our gross margins
in the near future, the medium to long term prospects of our niche remain optimistic. We believe that our unique capabilities and
know-how give us a competitive advantage to grow sales and build a globally recognized brand as we continue to carry out R&D
and expand to new segments, customers and markets.

The following are some financial highlights
for the first fiscal quarter:

●

Revenues: Our revenues were
approximately $6.0 million for the quarter, a decrease of 85.9% from last year.

●

Gross Margin: Gross margin was (24.6%) for the quarter, compared to 0.1% last year.

●

Loss from operations before tax: Loss from operations before tax was approximately $4.2 million for the quarter, compared to a loss of approximately $1.0 million last year.

●

Net loss: Net loss was approximately $4.2 million for the quarter, compared to a net loss of approximately $1.1 million last year.

●

Fully diluted loss per share: Fully diluted loss per share was $1.09 for the quarter, compared to a loss per share of $0.28 last year.

Results of Operations

The following table sets forth key components
of our results of operations for the three months ended September 30, 2012 and 2011 and as a percentage of revenues.

(All amounts in U.S.
dollars)

2012

2011

Amount

% of Revenues

Amount

% of Revenues

Sales Revenues

5,956,760

100.0

42,166,843

100.0

Cost of goods sold (including depreciation and amortization)

7,423,709

124.6

42,105,073

99.9

Gross (loss)/profit

(1,466,949

)

(24.6

)

61,770

0.1

Selling expenses

29,273

0.5

68,304

0.2

Administrative expenses

442,615

7.4

294,076

0.7

Allowance for bad and doubtful debts

1,373,000

23.0

-

-

Depreciation and amortization expense

51,961

0.9

54,444

0.1

(Loss) from operations

(3,363,798

)

(56.5

)

(355,054

)

(1.0

)

Total other expense

(858,485

)

(14.4

)

(669,729

)

(1.6

)

(Loss) from operations before income tax

(4,222,283

)

(70.9

)

(1,024,783

)

(2.4

)

Income tax expense

—

—

54,312

0.1

Net (loss)

(4,222,283

)

(70.9

)

(1,079,095

)

(2.6

)

Basic (loss) per share

(1.09

)

(0.02

)

Diluted (loss) per share

(1.09

)

(0.02

)

- 6 -

Sales Revenues

Sales volume decreased
by 39,795 tons, or 83.0%, period-on-period, to 7,753 tons for the three months ended September 30, 2012, from 45,548 tons for the
three months ended September 30, 2011 and as a result, sales revenues decreased by $36,210,083, or 85.9%, period-on-period, to
$5,956,760 for the three months ended September 30, 2012, from $42,166,843 for the three months ended September 30, 2011. The decrease
in sales revenues period-on-period is mainly attributable to the decrease in production and sales of our low-carbon cold-rolled
products in an effort to reduce the sales of these loss-making products.

Sales by Product Line

A break-down of our sales by product line
for the periods ended September 30, 2012 and 2011 is as follows:

2012

2011

Product Category

Quantity

(tons)

$ Amount

% of

Sales

Quantity

(tons)

$ Amount

% of

Sales

Period-on-

Period Qty.

Variance

Low carbon hard-rolled

1,470

1,133,619

19

261

239,887

1

1,209

Low carbon cold-rolled

3,513

2,047,911

34

37,060

33,275,228

79

(33,547

)

High-carbon hot-rolled

37

13,197

<1%

2,242

2,482,929

6

(2,205

)

High-carbon cold-rolled

2,838

2,545,164

43

4,339

4,316,010

10

(1,501

)

Subcontracting income

(105

)

9,024

<1%

1,646

1,032,321

2

(1,751

)

Sales of scrap metal

-

207,845

4

-

820,468

2

-

Total

7,753

5,956,760

100

45,548

42,166,843

100

(37,795

)

During
the three months ended September 30, 2012, domestic sales decreased across all product categories although there was a small increase
in the sales of the exported low carbon hard-rolled steel products. Low-carbon cold-rolled steel products accounted for 34% of
the current sales mix at an average selling price of $583 per ton for the three months ended September 30, 2012, compared to 79%
of the sales mix at an average selling price per ton of $898 for the three months ended September 30, 2011. The decrease in sales
in this category during the quarter was mainly due to streamlined production to reduce the sales of these loss-making products.
Low-carbon hard-rolled steel products accounted for 19% of the current sales mix at an average selling price of $771 per ton for
the three months ended September 30, 2012, compared to 1% of the sales mix at an average selling price per ton of $919 for the
three months ended September 30, 2011, due to an increase in demand in the export market as a result of our more competitive selling
prices in the global market during the period. High-carbon cold-rolled steel products accounted for 43% of the current
sales mix at an average selling price of $897 per ton for the three months ended September 30, 2012, compared to 10% of the sales
mix at an average selling price of $995 for the three months ended September 30, 2011. The products in this category are mainly
used in the automobile industry and the decrease in sales volume period-on-period was a result of the slowing demand for automobiles
in the PRC market. Subcontracting income revenues accounted for $9,024, or less than 1%, of the sales mix for the three months
ended September 30, 2012, decreased from $1,032,321, or 2%, of the sales mix for the three months ended September 30, 2011, due
to reduced demand. The negative quantity was due to the return of one batch of sample products with a small sales revenue.

- 7 -

2012

2011

Variance

Average Selling Prices

($)

($)

($)

(%)

Low-carbon hard-rolled

771

919

(148

)

(16.1

)

Low-carbon cold-rolled

583

898

(315

)

(35.1

)

High-carbon hot-rolled

353

1,107

(754

)

(68.1

)

High-carbon cold-rolled

897

995

(98

)

(9.8

)

Subcontracting income

(86

)

627

(713

)

(113.7

)

The average selling
price per ton decreased to $768 for the three months ended September 30, 2012, compared to $926 in 2011, representing a decrease
of $158, or 17.1%, period-on-period. This decrease was mainly due to decreases in general steel prices and therefore our selling
prices during the quarter. Average selling prices decreased across all product categories during the three months ended September
30, 2012.

Sales Breakdown by Major Customer

2012

2011

Customers

$

% of

Sales

$

% of

Sales

Changshu Jiacheng Steel Plating Co., Ltd.

699,359

12

1,702,702

4

Unimax & Far Corporation

637,147

11

*

*

Shanghai Wozi Jintian Blade Co., Ltd

607,652

10

*

*

Zhejiang Zhongwei Construction Materials Co., Ltd

489,025

8

*

*

Steelforce NV

328,591

5

Shanghai Shengdejia Metal Co., Ltd.

*

*

7,505,117

18

Hangzhou Cogeneration Co., Ltd.

*

*

7,504,827

18

Shanghai Changshuo Steel Co., Ltd.

*

*

5,644,432

13

Zhejiang Yongfeng Steel Co., Ltd.

*

*

5,271,256

13

2,761,774

46

27,628,334

66

Others

3,194,986

54

14,538,509

34

Total

5,956,760

100

42,166,843

100

* Not major customers
for the relevant periods

Sales revenue generated
from our top five major customers as a percentage of total sales was 46% for the three months ended September 30, 2012, as compared
to 66% in 2011. The change in customer mix reflects management’s continuous efforts in expanding our customer base and geographical
coverage during the course of the quarter.

Cost of Goods Sold

Cost of sales decreased
by $34,681,364, or 82.4%, period-on-period, to $7,423,709 for the three months ended September 30, 2012, from $42,105,073 for the
three months ended September 30, 2011. Cost of sales represented 124.6% of sales revenues for the three months ended September
30, 2012, compared to 99.9% for the three months ended September 30, 2011. Average cost per unit sold increased to $957 for the
three months ended September 30, 2012, compared to $924 for the three months ended September 30, 2011, representing an increase
of $33 per ton, or 3.6%, period-on-period.

2012

2011

Variance

($)

($)

($)

(%)

Cost of goods sold

- Raw materials

4,435,761

38,457,731

(34,021,970

)

(88.5)

- Direct labor

139,068

150,802

(11,734

)

(7.8)

- Manufacturing overhead

2,848,880

3,496,540

(647,660

)

(18.5)

7,423,709

42,105,073

(34,681,364

)

(82.4)

Cost per unit sold

Total units sold (tons)

7,753

45,548

(37,795)

(83.0)

Average cost per unit sold ($/ton)

957

924

33

3.6

- 8 -

The increase in average per unit cost of
sales is represented by the combined effect of:

●

an increase in factory overhead per unit sold of $290, or 376.6%, from $77 for the three months ended September 30, 2011, to $367 for the three months ended September 30, 2012;

●

an increase in direct labor per unit sold of $15, or 500.0%, from $3 for the three months ended September 30, 2011, to $18 for the three months ended September 30, 2012, offset by;

●

a decrease in cost of raw materials per unit sold of $272, or 32.2%, from $844 for the three months ended September 30, 2011, to $572 for the three months ended September 30, 2012.

The cost of raw materials
consumed decreased by $34,021,970, or 88.5%, period-on-period, to $4,435,761 for the three months ended September 30, 2012, from
$38,457,731 for the three months ended September 30, 2011. This decrease was mainly due to a substantial decrease in total units
sold during the three months ended September 30, 2012.

Direct
labor costs decreased by $11,734, or 7.8%, period-on-period, to $139,068 for the three months ended September 30, 2012, from $150,802
for the three months ended September 30, 2011. Manufacturing overhead costs decreased by $647,660,
or 18.5%, period-on-period, to $2,848,880 for the three months ended September 30, 2012, from
$3,496,540 for the three months ended September 30, 2011. The decrease was mainly attributable to the combined effect of a decrease
in utilities of $384,399, or 40.4%, period-on-period, to $566,724 for the three months ended September 30, 2011, from $951,123
for the three months ended September 30, 2011, and a decrease in consumables of $149,033, or 31.7%, period-on-period, to $320,617
for the three months ended September 30, 2012, from $469,650 for the three months ended September 30, 2011.

Gross Profit

Gross profit in absolute
terms decreased by $1,528,719 or 2,474.9%, period-on-period, to a gross loss of $1,466,949 for the three months ended September
30, 2012, from a gross profit of $61,770 for the three months ended September 30, 2011. Gross profit margin decreased to (24.6%)
for the three months ended September 30, 2012, from 0.1% for the three months ended September 30, 2011. The decrease in gross profit
margin is mainly attributable to a 17.1% period-on-period decrease in average selling prices and a 3.6% period-on-period increase
in average cost per unit sold.

Selling Expenses

Selling
expenses decreased by $39,031, or 57.1%, period-on-period, to $29,273 for the three months ended September
30, 2012, from $68,304 for the three months ended September 30, 2011. The decrease was mainly attributable to lower transportation
costs and traveling expenses period-on-period.

Administrative Expenses

Administrative expenses
increased by $148,539 or 50.5%, period-on-period, to $442,615 for the three months ended September 30, 2012, compared to $294,076
for the three months ended September 30, 2011. This was mainly due to an increase in legal and professional fees period-on-period.

Allowance for Bad and Doubtful Debts

Allowance for bad
and doubtful debts increased by $1,373,000, or 100.0%, period-on-period. Allowance recognized for the three months ended September
30, 2012 was in the amount of $1,373,000 in accordance with our policy for allowance for doubtful accounts.

- 9 -

Loss from Operations

Loss from operations
increased by $3,008,744, or 847.4%, period-on-period, to a loss of $3,363,798 for the three months ended September 30, 2012, from$355,054
for the three months ended September 30, 2011, as a result of the factors discussed above.

Other Income

Other income
decreased by $96, or 48.2%, to $103 for the three months ended September 30, 2012, from $199 for the three months ended
September 30, 2011, due to lower interest income period-on-period.

Interest Expense

Total interest
expense increased by $188,660, or 28.2%, to $858,588 for the three months ended September 30, 2012, from $669,928 for the
three months ended September 30, 2011, due to the accrued late payment penalty interest as a result of the loan default.

Income Tax

For the three months
ended September 30, 2012, we recognized no income tax expense, compared to an income tax expense of $54,312 for the three months
ended September 30, 2011. The decrease of $54,312, or 100.0%, in income tax expense was a result of the net loss for the three
months ended September 30, 2012.

Net Loss

Net loss increased
by $3,143,188, or 291.3%, period-on-period, to $4,222,283 for the three months ended September 30, 2012, from $1,024,783 for the
three months ended September 30, 2011. The increase in net loss is attributable to a combination of all the factors discussed above,
principally the negative gross margin and the increase in allowance for bad and doubtful debts.

Liquidity and Capital Resources

Our business is capital
intensive and requires substantial expenditures for, among other things, the purchase and maintenance of equipment used in our
operations. Our short-term and long-term liquidity needs arise primarily from capital expenditures, working capital requirements
and principal and interest payments related to our outstanding indebtedness. We have met these liquidity requirements with cash
provided by operations, equity financing, and bank debt. As of September 30, 2012, we had cash and cash equivalents of approximately
$1.6 million.

The following table
provides detailed information about our net cash flows for all financial statement periods presented in this report:

CASH FLOWS

Three Months Ended September 30,

2012

2011

Net cash provided by operating activities

$

171,468

$

303,740

Net cash (used in) investing activities

(7,424

)

(84,886

)

Net cash (used in) financing activities

-

(810,921

)

Net cash flow

(7,238

)

(554,701

)

Operating Activities

Net cash flows provided
by operating activities for the three months ended September 30, 2012 were $171,468, as compared to $303,740 provided by operating
activities for the three months ended September 30, 2011, resulting in a net decrease of $132,272. This decrease was mainly due
to an increase in cash outflows for inventories of $2,233,504, a decrease in cash inflow from advances from customers of $3,259,771,
a decrease in cash inflows from accounts payable and accrued expenses of $1,349,576, and a decrease in cash inflow from other taxes
payable of $771,130, which were offset by an increase in cash inflow from accounts receivable of $7,572,397 during the three months
ended September 30, 2012.

- 10 -

For the three months
ended September 30, 2012, sales revenues generated from the top five major customers as a percentage of total sales was 46%, as
compared to 66% in the prior period. The loss of all or portion of the sales volume from a significant customer would have an adverse
effect on our operating cash flows. We note that the continuation or intensification of the worldwide economic crisis may have
negative consequences on the business operations of our customers and adversely impact their ability to meet their financial obligations
to us, resulting in unrecoverable losses on our accounts receivable. We have been strengthening our collection activities and will
continue to closely monitor any changes in collection experience and the credit ratings of our customers. From time to time we
will review credit periods offered, along with our collection experience and the other relevant factors, to evaluate the adequacy
of our allowance for doubtful accounts, and to make changes to the allowance, if necessary. Delays or non-payment of accounts receivable
would have an adverse effect on our operating cash flows.

Investing Activities

Our uses of cash for
investing activities during the three months ended September 30, 2012 were for the purchase of additional property, plant and equipment
to complement our existing production facilities.

Net cash flows used
in investing activities for the three months ended September 30, 2012 were $7,424, as compared with $84,886 for the three months
ended September 30, 2011. Cash flows used in investing activities substantially decreased period-on-period as majority of the
construction of the additional annealing furnaces have been completed.

We forecast lower
capital expenditures in the coming years as the Company has already completed most of its major expansion plans.

Financing Activities

Net cash flows used
in financing activities for the three months ended September 30, 2012 were $nil, as compared to $810,921 for the three months ended
September 30, 2011, for a net decrease of $810,921 as the Company did not make any loan repayment during the three months ended
September 30, 2012.

On December 30, 2008,
we filed a universal shelf registration statement with the SEC, which was declared effective on December 10, 2009. The shelf registration
will permit us to issue securities valued at up to an aggregate of $40 million. The effective registration statement provides us
with the flexibility to issue registered securities, from time to time, in one or more separate offerings or other transactions
with the size, price and terms to be determined at the time of issuance. Although we do not have any commitments or current intentions
to sell securities under the registration statement, we believe that it is prudent to have a shelf registration statement in place
to ensure financing flexibility should the need arise.

Our working capital requirements and the cash
flow provided by future operating activities will vary from quarter to quarter, and are dependent on factors such as volume of
business and payment terms with our customers. As such, we may need to rely on access to the financial markets to provide us with
significant discretionary funding capacity. However, the current uncertainty arising out of domestic and global economic conditions,
including the continuing disruption in credit markets, poses a risk to the economies in which we operate and may adversely impact
our potential sources of capital financing. The general unavailability of credit could make capital financing more expensive for
us or impossible altogether. Even if we are able to obtain credit, the incurrence of indebtedness could result in increased debt
service obligations. In June and July 2012, we defaulted on the repayment obligations of our short-term and long-term bank loans
totaling $43,751,689. We are currently in discussions with our banks regarding the restructuring of these loans for repayment but
have not yet agreed on specific terms. There can be no assurance that the Company will be able to successfully work out a repayment
plan or otherwise fulfill its obligations under the loans. Further, each of these lenders has the right to take possession of the
collateral (which collectively constitute substantial assets of the Company) granted in connection with their respective loan agreements.
The unavailability of debt financing as a result of economic pressures on the credit and equity markets could have a material adverse
effect on our business operations.

- 11 -

Going Concern

Historically, we have funded our operations
and expansion expenditures from cash generated by operating activities, bank borrowings and issuance of common stock. We believe
that we have the financial resources needed to meet business requirements for the next twelve months if we are able to work out
a repayment plan acceptable to us with our banks for the defaulted loans. The uncertainty surrounding the successful restructuring
of our bank loans and our current lack of readily available liquidity provided by other third party sources raise substantial doubt
about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern.

Current Assets

Current assets increased
by $63,305, or 0.1%, period-on-period, to $115,643,144 as of September 30, 2012, from $115,579,839 as of June 30, 2012, principally
as a result of an increase in inventories of $2,099,231, or 13.5%, period-on-period, offset by a decrease in accounts receivable
of $1,184,793, or 2.0%, and a decrease in advances to suppliers of $420,091, or 1.1%, period-on-period.

Accounts receivable,
representing 50.1% of total current assets as of September 30, 2012, is a significant asset of the Company. We offer credit to
our customers in the normal course of our business and accounts receivable is stated net of allowance for doubtful accounts. Credit
periods vary substantially across industries, segments, types and size of companies in China where we principally operate our
business. Because of the niche products that we process, our customers are usually also niche players in their own respective
segment, who then sell their products to the end product manufacturers. The business cycle is relatively long, as well as the
credit periods. The Company offers credit to its customers for periods of 60 days, 90 days, 120 days and 180 days. We generally
offer longer credit terms to long-standing recurring customers with good payment histories and sizable operations.

Our management determines
the collectability of outstanding accounts by maintaining at least quarterly communication with such customers and obtaining confirmation
of their intent to fulfill their obligations to the Company. In making this determination, our management also considers past collection
experience, our relationship with customers and the impact of current economic conditions on our industry and market. We note that
the continuation or intensification of the current global economic crisis may have negative consequences on the business operations
of our customers and adversely impact their ability to meet their financial obligations. To reserve for potentially uncollectible
accounts receivable, for the three months ended September 30, 2012, our management has made a 50% provision for all accounts receivable
that are over 180 days past due and full provision for all accounts receivable over one year past due. From time to time, we will
review these credit periods, along with our collection experience and the other factors discussed above, to evaluate the adequacy
of our allowance for doubtful accounts, and to make changes to the allowance, if necessary. If our actual collection experience
or other conditions change, revisions to our allowances may be required, including a further provision which could adversely affect
our operating income, or write back of provision when estimated uncollectible accounts are actually collected.

The following table
reflects the aging of our accounts receivable based on due date as of September 30, 2012 and June 30, 2012:

September 30,
2012

US$

Total

Current

1 to 30 days

31 to

90 days

91 to 180 days

181 to 360

days

over

1 year

TOTAL

62,587,676

11,885,246

12,218,396

9,597,734

20,836,045

6,787,156

1,263,099

%

100

19

20

15

33

11

2

- 12 -

June 30, 2012

US$

Total

Current

1 to 30 days

31 to

90 days

91 to 180 days

181 to 360

days

over

1 year

TOTAL

62,348,544

24,573,802

4,167,802

9,451,142

18,940,851

3,964,416

1,250,531

%

100

40

7

15

30

6

2

Management continues
to take appropriate actions to perform business and credit reviews of any prospective customers (whether new or returning) to protect
the Company from any who might pose a high credit risk to our business based on their commercial credit reports, our past collection
history with them, and our perception of the risk posed by their geographic location. For example, we have halted since the year
ended June 30, 2011 all our sales transactions directly with customers in the Philippines as we consider the associated credit
risk to be relatively high. Based on publicly available reports, such as that issued by A.M. Best, there is a high risk that financial
volatility may erupt in that country due to inadequate reporting standards, a weak banking system or asset markets and/or poor
regulatory structure. We expect to resume such exports when conditions improve.

Current Liabilities

Current liabilities
increased by $1,463,012, or 2.2%, period-on-period, to $68,138,888 as of September 30, 2012, from $66,675,876 as of June 30, 2012.
The increase was mainly attributable to an increase in accounts payable and accrued liabilities of $529,534, or 7.8%, period-on-period,
and an increase in advances from customers of $544,998, or 24.2%, period-on-period.

As of September 30,
2012, we had $27,551,689 in short-term loans. Principal and interest under the loans were to be repaid in full on July 31, 2012,
but the Company has defaulted on this repayment obligation. The Company is currently in discussion with its bank regarding the
restructuring of these loans but there can be no assurance that the Company will be able to successfully work out a repayment
plan or otherwise fulfill its obligations under the loan.

Capital Expenditures

During the three months
ended September 30, 2012, we invested $7,424 in purchases of additional property, plant and equipment.

Loan Facilities

The following table illustrates our credit
facilities as of September 30, 2012, providing the name of the lender, the amount of the facility, the date of issuance and the
maturity date:

All amounts in U.S.
dollars

Lender

Date of Loan

Maturity Date

Duration

Interest Rate

Principal Amount

Raiffeisen

June 29, 2011

July 31, 2012

1 year

1.15 times

$

7,980,347

Zentralbank Österreich AG (“RZB”)

the PBOC rate

RMB

(50,154,084

)

Raiffeisen

June 29, 2011

July 31, 2012

1 year

1.15 times the

$19,571,342

Zentralbank Österreich AG

PBOC rate

RMB

(123,000,000

)

DEG – Deutsche Investitions – und

June 29, 2010

June 15, 2016

6 years

6 month USD

$16,200,000

Entwicklungsgesellschaft mbH

LIBOR + 4.5%

RMB

(101,812,140

)

Total

$

43,751,689

On January 29, 2010, Shanghai Blessford entered
into a Senior Loan Agreement with DEG -Deutsche Investitions-Und Entwicklungsgesellschaft Mbh, or “DEG,” for a loan
amount up to $18,000,000 at an annual interest rate of 4.5% above the six-month USD LIBOR rate. The loan is secured by a mortgage
on the new cold rolling line and annealing furnaces at Shanghai Blessford’s facilities and guaranteed by the Company. The
loan was to have been repaid semi-annually over five years starting on December 15, 2011, but the Company has defaulted on this
repayment obligation, as well as on repayment of the June 15, 2011 installment. The Company is currently in discussions with DEG
regarding the restructuring of the loans for repayment but has not yet agreed on specific terms. Until such agreement is reached,
DEG has the right to cancel the total outstanding commitment of the loan, demand immediate repayment of the loan or any part thereof
together with accrued interest, and/or terminate the loan agreement. DEG may also take possession of the collateral granted in
connection with their respective loan agreements, which would have a material adverse impact on the Company. There can be no assurance
that the Company will be able to successfully work out a repayment plan with DEG or otherwise fulfill its obligations under the
loan.

- 13 -

On June 29, 2011, the Company entered into
two short-term loan agreements with Raiffeisen Zentralbank Osterreich AG, or “RZB,” pursuant to which the Company borrowed
an aggregate of $27,551,689 at an annual interest rate of 1.15 times the standard market rate set by the People’s Bank of
China. The loans are secured by inventories, land use rights, buildings and plant and machinery, and is guaranteed by PSHL and
our former Chairman, Mr. Wo Hing Li. Mr. Li also undertook to maintain a shareholding percentage in the Company of not less than
33.4% unless otherwise agreed to with RZB. Principal and interest under the loans were to be repaid in full on July 31, 2012, but
the Company has defaulted on this repayment obligation. The Company is currently in discussions with RZB regarding the restructuring
of the loans for repayment but has not yet agreed on specific terms. Any restructuring will be subject to approval by RZB’s
governing bodies, and to the Company’s ability to meet certain conditions and requirements that may be imposed by the Bank.
Until such agreement is reached, RZB has the right to take possession of the collateral granted in connection with the loan agreement,
which action would have a material adverse impact on the Company. There can be no assurance that the Company will be able to successfully
work out a repayment plan with RZB or otherwise fulfill its obligations under the loan.

Obligations under Material Contracts

Below is a table setting forth our material
contractual obligations as of September 30, 2012, debt obligations include principal repayments and interest payments:

Payments Due By Year

Contractual obligations:

Total

Fiscal Year 2013

Fiscal Year 2014-2015

Fiscal Year 2016-2017

Fiscal Years 2018 and Beyond

Short-Term Debt Obligations

$

29,452,756

$

29,452,756

$

-

$

-

$

-

Current Portion of Long-Term Debt Obligations

$

17,031,173

$

17,031,173

$

-

$

-

$

-

$

46,483,929

$

46,483,929

$

-

$

-

$

-

Recent Accounting Pronouncements

In December 2011,
the FASB issued ASU No. 2011-11, Disclosures About Offsetting Assets and Liabilities, (“ASU 2011-11”). The amendments
in ASU 2011-11 require entities to disclose information about offsetting and related arrangements to enable users of financial
statements to understand the effect of those arrangements on an entity’s financial position. The amendments require enhanced
disclosures by requiring improved information about financial instruments and derivative instruments that are either (i) offset
in accordance with current literature or (ii) subject to an enforceable master netting arrangement or similar agreement, irrespective
of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years, and interim periods
within those years, beginning on or after January 1, 2013. This standard will become effective for the Company beginning July 1,
2013. The Company does not believe adoption of this new guidance will have a significant impact on its consolidated financial statements.

In
July 2012, the FASB issued ASU
No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible
Assets for Impairment (“ASU 2012-02”). ASU 2012-02 amends Topic 350 by establishing an optional two-step analysis
for impairment testing of indefinite-lived intangibles other than goodwill. This update allows an entity the option to first assess
qualitative factors to determine whether it is necessary to perform the quantitative impairment test. Under that option, an entity
no longer would be required to calculate the fair value of the intangible asset unless the entity determines, based on that qualitative
assessment, that it is more likely than not that its fair value is less than its carrying amount. ASU 2012-02 is effective for
annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption is permitted.
This standard will become effective for the Company beginning July 1, 2013. The Company does
not believe adoption of this new guidance will have a significant impact on its consolidated financial statements.

- 14 -

Seasonality

Our operating results
and operating cash flows historically have been subject to seasonal variations. Our revenues are usually higher in the second half
of the calendar year than in the first half of the calendar year and the first quarter of the calendar year is usually the slowest
quarter because fewer projects are undertaken during and around the Chinese New Year holidays.

Off-Balance Sheet Arrangements

For the three months ended September 30,
2012, we did not have any off-balance sheet arrangements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be
disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange
Act, our management, including our Chief Executive Officer, Mr. Hai Sheng Chen, and Chief Financial Officer, Ms. Leada Tak Tai
Li, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2012.
Based upon, and as of the date of this evaluation, Mr. Chen and Ms. Li, determined that because of the material weaknesses described
below, as of September 30, 2012 our disclosure controls and procedures were not effective.

During its review of our consolidated financial
statements for the fiscal quarter ended September 30, 2012, our management concluded that our accounting staff lacked sufficient
accounting skills and experience necessary to fulfill our public reporting obligations according to U.S. GAAP and the SEC’s
rules and regulations.

Management is currently seeking for and plans
to appoint qualified personnel as soon as practicable to remediate this material weakness. Our management does not believe that
this material weakness had a material effect on our financial condition or results of operations or caused our financial statements
as of and for the fiscal quarter ended September 30, 2012, such as to contain a material misstatement.

Changes in Internal Controls over Financial Reporting

We regularly review our system of internal
control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while
ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more
efficient systems, consolidating activities, and migrating processes.

There were no changes in our internal control
over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

- 15 -

PART II

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

From time to time, we may become involved in
various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent
uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business.

On March 15, 2012, the Company received notice
of a complaint filed by Mr. Haining Zhang and China Venture Partners, Inc. in the U.S. Southern District Court of New York on March
9, 2012, against several defendants, including the Company, as successor to OraLabs Holding Corp. In the complaint Mr. Zhang is
alleging, among other things, breach of contract by the Company and certain of our former officers, directors and control persons,
in connection with our December 2006 acquisition of Partner Success Holdings Limited. Among other things, Mr. Zhang alleges that
the defendants breached an agreement to compensate him for services he allegedly performed in connection with seeking out a merger
candidate for the Company. The Company believes that the suit is without merit and intends to vigorously defend its interests in
the case. The Company was granted court permission to file a motion to dismiss the action as against it. Prior to filing the motion
to dismiss, plaintiffs amended their complaint. Accordingly, the Company filed a motion to dismiss the amended complaint. That
motion has now been fully briefed by the parties. The court has not yet advised whether it will permit oral argument on the motion
prior to issuing a decision. An estimate of any potential loss cannot be made at this time.

Except with respect to the foregoing proceeding,
we are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our
business, financial condition or operating results.

ITEM 1A.

RISK FACTORS.

Not Applicable.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.

OTHER INFORMATION.

We have no information to disclose that was
required to be in a report on Form 8-K during the period covered by this report, but was not reported. There have been no material
changes to the procedures by which security holders may recommend nominees to our board of directors.

- 16 -

ITEM 6.

EXHIBITS.

The following exhibits are filed as part of this report or incorporated
by reference:

Exhibit
No.

Description

31.1*

Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101*

Interactive data files pursuant to Rule 405 of Regulation S-T

*

Filed
with
this
Form
10-Q
for
China
Precision
Steel,
Inc.
Pursuant
to
Rule
406T
of
Regulation
S-T,
the
interactive
data
files
on
Exhibit
101
hereto
are
deemed
not
filed
or
part
of
a
registration
statement
or
prospectus
for
purposes
of
Sections
11
or
12
of
the
Securities
Act
of
1933,
as
amended,
or
for
purposes
of
Section
18
of
the
Securities
Act
of
1934,
as
amended,
and
otherwise
are
not
subject
to
liability
under
those
sections.

- 17 -

SIGNATURES

In accordance with Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 16, 2012

CHINA PRECISION STEEL, INC.

By:

/s/ Hai Sheng Chen

Hai Sheng Chen, Chief Executive Officer

(Principal Executive Officer)

By:

/s/ Leada Tak Tai Li

Leada Tak Tai Li, Chief Financial Officer

(Principal Financial Officer and Principal

Accounting Officer)

- 18 -

Exhibit
No.

Description

31.1*

Certifications of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certifications of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101*

Interactive data files pursuant to
Rule 405 of Regulation S-T

*

Filed
with this Form 10-Q for China Precision Steel, Inc. Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit
101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities
Act of 1933, as amended, or for purposes of Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject
to liability under those sections.

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